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Pearl Securities Limited – Pakistan Research

Karachi, January 05, 2016 (PPI-OT): Consumer Price Index – Dec’15 inflation stands at 3.19%

Key Features

Inflation continues upward trajectory; CPI inched up to 3.19% YoY in Dec’15, a consistent upward trend against rate of 2.73% (Nov’15) and 1.61% (Oct’15). On the other hand, growth rate is still lower (111 bps) against rate of 4.30% (Dec’14).

Main factors behind growth are; 1.) 11 bps increase in the heavy weight (~35% weight) Food and Beverage (F and B) basket and, 2.) significant lower negative growth of the Transport basket.

Overall, cumulative inflation for 1H FY16 is recorded at 2.06%, substantially lower against 6.12% inflation rate in first half FY15.

Growth in other notable baskets such as Housing, Water, Elec., Gas and Fuels (HWEGF) and Clothing and Footwear (CF) remained unchanged.

Core inflation measured by the non-food non-energy (NFNE) increased by 4.1% YoY in Dec’15, slightly greater against 4.0% in the previous month but lower against growth of 6.7% in Dec’14.

With uptrend in inflation, the Real Interest Rate (RII) has contracted to 3.36%. In Pearl Securities Limited’s opinion, there is plenty of room to maintain accommodative stance hence Pearl Securities Limited expects status quo in upcoming MPS (Jan’16).

Uptrend continues; Dec’15 CPI at 3.19%

As per market consensus, CPI inflation has continued its uptrend, clocking in at 3.19% for Dec’15. Since bottoming out at 1.32% in Sep’15, CPI inflation has been consistently increasing on the back of greater food and POL product prices.

Increased inflation during the outgoing month is primarily due to 11 bps YoY increase in the heavy weight F and B basket (~35% weight in CPI) and significant negative growth in the transport index(~7% weight), reaching -4.04% in Dec’15 against -7.05% in the previous month.

Inflation of the F and B Basket increased to 1.44% YoY in Dec’15, an 11 bps increase against rate of 1.33% in Nov’15. To name a few products; prices of Pulse Gram, Besan, Chicken and Onions increased by 38%, 32%, 14% and 11% respectively (on yearly basis).

Moving forward, with overall crop yield decline of 4.5% YoY in CY15, Pearl Securities Limited can expects upward food price pressure to persist in the near term. On the other hand, recent Rs.3/ltr reduction on HSD prices could slowdown Transport index recovery.

HWEGF and CF Inflation unchanged

Inflation in the other heavy weight baskets of Housing, Water, Energy, Electricity, Gas and Fuels (HWEGF: ~29% weight) and Clothing and Footwear (CF: ~8% weight) remained unchanged in Dec’15. HWEGF inflation remained stagnant at 4.97% YoY while CF inflation stayed at 4.57% YoY.

Inflation growth of Housing and Gas is likely countered by low POL product prices and power tariff relief. On year over year basis, Kerosene Oil and Motor Fuel are still lower by 13.32% and 8.09% respectively.

RII contracts to 3.36%; SBP may maintain status quo

Real interest rate (RII) has contracted to 3.36% in Dec’15 against 3.77% in Nov’15 and 4.89% in Oct’15. Pearl Securities Limited believes SBP still has room to maintain accommodative stance at this level, Pearl Securities Limited expects policy rate to be maintained at 6% (DR at 6.5%) in the upcoming MPS, expected sometime this month. Moving forward, Pearl Securities Limited do anticipates a reversal in monetary stance Mar’15 onwards on the back of rising inflation on low base effect.

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